On the Simple Economics of Advertising, Marketing, and Product Design

We propose a framework for analyzing transformations of the demand facing a monopolist. Our approach is based on the observation that such transformations frequently stem from changes in the dispersion of consumers’ valuations, which lead to rotations of the demand curve. In a wide variety of settings, profits are a U-shaped function of dispersion. The monopolist will adopt a mass-market posture when dispersion is low, and a niche posture when dispersion is high. We investigate numerous applications of our framework, including product design and development; advertising, marketing and sales advice; and the construction of quality-differentiated product lines. We also suggest a new taxonomy of advertising, distinguishing between hype, which shifts demand, and real information, which rotates demand.